Financial independence allows you to completely control your time. Being independent, you do not have to choose between work and spending time with your family. This guide is intended to explain how to achieve financial independence.
Most of what you were told about money growth, income, and wealth is not true. This is understandable - think about who you first heard about it from (strange people, because they themselves were not rich). In order not to confuse high incomes with wealth, in order to understand the importance of placing an asset when choosing an investment, you should read this article very carefully.
After that, you will understand why some professional athletes earning $ 20 million a year go broke quickly, and the bus driver can turn into a multimillionaire and not have any financial worries.
In fact, this guide explains step by step how to achieve financial independence. It was designed to let you know how to get rid of income worries, which can be caused by monetary difficulties.
This step-by-step guide to financial independence is part of our large-scale project aimed at teaching new investors how to get more income.
Income is not wealth
Most people think that the key to wealth is a high paying job. Yes, it’s much easier to collect assets if you have a lot of money coming in every month, but the true secret to increasing capital is the habit of spending less than you earn. This is a cliche, but it is a fundamental, absolute, immutable reality of money. To avoid this trap, you must understand that profit is not wealth.
The true secret to increasing capital is the habit of spending less than you earn.
What is wealth? My personal definition: wealth is part of your net worth (capital minus debts), which generates capital gains, income and dividends without your labor. If you are a doctor or a lawyer, you must make a lot of efforts and work at least a dozen years to get a more or less good salary.
On the other hand, if you have a private business portfolio, a car wash, a garage, stocks, bonds, mutual funds, real estate, patents, trademarks, and other money generators, you could sit at the poolside and earn income.
This means that you could achieve financial independence and maintain your lifestyle, even if you do not make any efforts. And also remember that wealth loves account and attention - therefore it is constantly necessary to invest in something.
The level of your well-being should be measured by the length of time during which you could maintain your standard of living without additional salary. In other words, if you get fired, how long could you continue to buy clothes, food, appliances, video games, etc., that is, live as you used to?
In fact, the average person will not be able to exist for a long time in such conditions, and the more he earns, the more he wonders why he cannot gain financial independence, which directly slips out of his hands.
You must have free funds to invest
Napoleon Hill said: "Think and be rich." Financial success begins with the habit of saving. When this opportunity presents itself, then take advantage of it, because people who have savings receive a large income from them. And in some cases it lasts even for a lifetime.
One way to take advantage of investment opportunities is to invest in mutual funds. The reality of a successful investment is that there is a certain level at which you can get the maximum return.
For example, 10% of the income from $ 10,000 will be “as much” as $ 1,000, which is unlikely to greatly replenish your wallet, but if you have an investment of $ 1,000,000, the income from this amount will be $ 100,000. This, you see, is much more, although the costs and efforts are the same. Also a good investment option is investment in gold. After all, gold rarely falls in value.
Accumulating wealth and gaining financial independence is a slow process that takes time. You need to do seemingly insignificant things every day, such as reducing your expenses, generating additional income, and transferring money to brokerage and retirement accounts with tax benefits.
Over time, such actions begin to produce results. Since you will receive income, with each new contribution you can invest more and more. This is called compounding. This is when interest, dividends and capital gains begin to create their interest, dividends and capital gains, and so on. For example, this explains how, out of $ 10,000, $ 2,890,000 can grow by more than 50 years by 12%. high interest deposits in banks.
The only way you can have more “free” money is to either increase income (salaries, business sales, paid hours, or any other type of income that would cover your accounts), or reduce costs. Remember this once and for all. Your choice should be either the option to increase revenue, or the option to reduce costs. And it is better both that, and another.
Not all revenues are equal. Here's an example abroad for a doctor earning from $ 250,000 a year, of which $ 95,000 is tax and net profit is $ 155,000. However, if he received the same amount through a retirement plan or IRA, he would not pay a dime. This is an additional $ 95,000 per year for compounding. If done deposits at 11% per annum for more than 30 years, this will be an additional $ 18 million in wealth. Yes, yes, $ 18,000,000 in revenue is simply due to a lack of taxation.
That is why you should do everything you can (within reason, of course) to fully fund your retirement plans. Each decision is important, even if it seems insignificant.
True wealth is the control of your time
True wealth is control over your time. And even if you can do what you love every morning when you get out of bed, then do not think that you are successful. You are just a highly paid "slave" of your salary.
How do you know that you are a truly rich person? Very simple - you fit into this category if you have full control over how you spend your day. For most people, this is not news, but so few of them really understand this basic truth.
It doesn't matter how much money you get if you spend all day at work that does not make you happy. If you have to perform actions for which you pay a lot, but which do not bring you true joy, then you are still not rich.
Every morning, when you appear in the office or at the workplace, or in the workshop, you should feel as if you are unwrapping a Christmas present when you turn the key. This is not some standard “template” advice.
If you find a profession that gives you this feeling, and you are disciplined in managing the business side and controlling costs, then you have a huge advantage over your competitors. And all because you will continue to work ten, fifteen, eighteen hours a day, not because you need it, or because you want another car, but because you love the process and the product itself. You cannot overcome your passion for this job.
Grades in studies have nothing to do with wealth and financial independence
According to extensive research by Thomas J. Stanley, Ph.D. in History, author of Millionaire Next Door, school grades have nothing to do with economic wealth and success. This is not to say that education is not the main thing! More than 90% of American millionaires are, in fact, graduates of the bachelor.
Then why do parents, teachers and spiritual mentors continue to tell the children that they will not be successful if they have an average score of 3? Statistically speaking, according to Stanley, this is because these people themselves cannot be financially successful.
Thus, they have no idea what it takes to achieve financial independence. They believe in the great myth that good students go further in life. They single out only analytical intelligence, not creative, which is responsible for the development of innovations, social achievements, and the ability to develop solutions in niche markets.
They also do not understand that most millionaires wear blue jeans, overalls, or work shirts, rather than suits and ties. They eat at McDonald’s and Burger King. They live in ordinary, established neighborhoods. Most have their own business.
Financial independence requires a complementary spouse
It doesn’t matter how successful you are if your spouse is not as disciplined, modest, investment oriented as you are. Indeed, in this case, all your efforts for a better, financially independent life will be like fighting quicksand.
Take your life companion very seriously, because the emotional, financial and social moods that it can bring into your life can suppress any progress that you can make in your career or earnings. You will try to build a life, and he or she will spend your money on status or prestige, which, in turn, makes financial independence almost unattainable.
To build a real life, you must have such support that allows you to take risks, because you know that no matter what happens, there will always be someone who is waiting at home and loves you unconditionally. This may sound surprising, but most of the success is based on the appropriate temperament and psychology of the spouse. After all, how can you focus on your work and creating the life that you have always dreamed of, if you do not have reliable support?
Niche markets are not as effective, but they are also profitable.
Billionaire and investor Charlie Munger noted that entrepreneurs can succeed if they specialize in an undiagnosed economic niche. Very often, these niches are extremely profitable. Do not believe me? In vain!
Recall the images of multimillionaires. What did you see? Business and yachts? Molecular biology? Although there are several multimillionaires among them, the biggest money comes from industries such as waste (garbage) recycling, pizzeria, clothing stores, trailer parks, candles, and delivery.
Consider the case of Sam Walton. He built a tiny store of cheap things in Arkansas, which later turned into the largest retailer in the world. It became a family income of more than $ 125 billion. There is nothing super-profitable in selling fifty-fifty slippers and cheap Cologne in small towns, but Walton set himself the goal of bringing inexpensive goods to everyday Americans. He was a man with a broad outlook. He built his company from one store, without fanfare and a red walkway.
Business owners represent a disproportionately large segment of the population of "millionaires." It's hard to believe, but there is a high probability that the owner of the largest hardware store or the plumber in your city makes many times more profits than the highest paid doctor.
Part of the reason is the concept we discussed, called capitalized profits. This is also what Dr. Stanley mentioned in his book. Doctors are forced to buy status to convince their patients that they are successfully working and treating effectively. And plumbing is useless. He can invest more in his retirement accounts. In this case, the main thing - choosing a good bank. Decades pass, and as a result, millions of extra wealth for the guy who cleaned the toilets instead of arteries. This is something that you will not be taught at school. And all that is needed for this is open a bank account.
Don’t financially overly support unpromising relatives
A common mistake is that some people often make gifts with money and support those relatives who are not able to generate high incomes themselves, or who are constantly in a difficult financial situation. I think the motivation system in this case is you!
The son will become a doctor and the daughter a lawyer, and you could say that they do not “need” your money, and at the same time you provide them with free housing, advice and help, while they are sitting at home around the neck in credit card debt, and can’t find a job.
No matter what religion you belong to and what skin color you have, you must follow the lesson from the parable of talents. The personality of the “parent” in the parable returns and gives more for those who have successfully invested and grown their wealth, and who speaks of those who could not reach these heights as “evil” and “lazy.”
Now you can not use such cruel words, but I will say bluntly: you will be unreasonable if you give all children money “in equal shares”, because some of them are clearly more productive than others. And you will be damn stupid if you give more to the losers.
Thus, you turn them into financial and credit addicts, and they are unlikely to ever get rid of this addiction. You become, in fact, a "drug dealer" who provides another "dose". The client tells you that this is the last time, but the fundamental, fundamental problem is his inability to manage money. They do nothing in order to earn money on their own, because they know that help always comes (if you ponder a little and beg).
The first factor is understanding where you are at the moment.
To determine your financial situation, you need to learn how to use your Financial GPS. To do this, draw a map with the point of your financial condition today (point A) and with the point where you would like to come (point B). The main route here will be from point A to point B. It will be discussed later.
Financial GPS works on the principle of a navigator. When you enter your destination in the navigator, it is attached to a point on the map, based on the positions of the satellites, and determines where you are currently. Then the navigator determines the point on the map where you need to get and paves the route.
Thus, during your trip, the navigator makes sure that you move in the right direction. If you stray from the route, the navigator will offer you to return to the right path. Financial GPS also works the same way.
On your credit card, the starting point will be Audit. Audit - this is the financial situation that you have now. To conduct an audit, you need to calculate your Expenses, Revenues, Cash Flow (Cash Flow) and Capital (see the article "The crisis of 2018. How to prepare for it").
Knowing these parameters, you will understand where you are on the financial card. The next thing to do is determine where you want to come. The achievement of financial independence is determined by the arrival at 3 points - the Financial Security Plan, the Financial Independence Plan and the Financial Freedom Plan. If you do not have any of these plans, then you live according to the 4th plan, plan B, that is, according to the Poverty Plan.
Financial plans are calculated as follows.
Financial Security Plan means having an amount equal to your Expenses for 6 months
These savings will allow you to maintain your existing standard of living for a long time in the event of job loss, business collapse, illness or other circumstances in which you will not be able to earn an active income. Having a Security Plan also lets you not worry about money. A good clear example of the significance of a safety plan is the Maslow Pyramid.
Each level of the pyramid has its own tasks. The basic level is the satisfaction of physiological needs (food, shelter, etc.). The next floor of the pyramid is the level of security. It includes physical, economic, political and financial security.
For example, if a country has a revolutionary situation, political, economic instability, or martial law, then a person has anxiety at the level of the second floor of the Maslow pyramid.
If a person is chronically short of money or there is none at all, then this is a financial security problem. A person who does not have enough money is like a person who is suffocating. He frantically begins to look for an opportunity to earn money and clutches at the first thing he comes across, without really understanding what it will bring to him. The objective of the Security Plan is to remove concern for your financial situation, find a new job, with a higher salary, or create a new business.
Когда у вас создан План Финансовой Безопасности, то есть сумма, равная вашим расходам за 6 месяцев, то возникает вопрос, где держать эти деньги. Одни держат деньги в банке на депозитном счете. Другие - вкладывают эту сумму в проекты в виде инвестиций. This is not true.
Деньги должны быть доступны в течение 24 часов. Вы должны иметь возможность получить необходимую сумму на руки в течение суток. An ideal option would be to keep 50% of the amount in cash and the remaining 50% in the bank. At the same time, it is better to keep the money in the bank not on a deposit, but on the account to which the card is attached and which accrues interest on the balance.
There are banks that charge approximately 10-15% on the balance of funds in national currency and 3-4% on foreign currency with no time limit for withdrawing money from the account. It is also necessary to pay attention to the fact that there may be restrictions on cashing money per day.
Financial Independence Plan
It assumes that you receive passive income in the amount of more than your expenses. For example, you earn $ 1000 per month in your main job. You also have 2 apartments that you can rent. You decided that you want to leave work, and you started renting your apartments for $ 500 per month. This way you get the same $ 1,000, but you don’t have to go to work.
Your quality of life has been preserved since income and expenses have remained the same. However, you have one of the most important resources - Time. Use it to achieve your goals. Spend time on your loved ones - family, friends, family. Devote this time to yourself - creativity, relaxation, travel, your favorite business, and more.
This time can also be devoted to the fulfillment of your desires, which previously did not have enough time.
Financial Freedom Plan
It assumes a monthly income that will allow you to lead the lifestyle that you dream about. Moreover, you have the quality of life that you deserve.
In order to achieve Financial Freedom, you need to calculate how much money you need. Many of you will think that you need a very large amount. However, in reality, this amount is not so large and unattainable. This money should be enough to have a high standard of living, and at the same time not to burden yourself with material excesses.
For example, you are unlikely to need 5 cars, 4 houses on the beach and 2 yachts. Having these things in one copy will give you the same enjoyment of life. Here we are not talking about the number of material things, but about their quality.
For example, instead of flying on vacation every 2 weeks, you can go on vacation once every 3 months, but fly in business class and live in the best hotel. You don’t need to go to the restaurant every day and order 5 dishes that you don’t end up eating, if you can go to the best restaurants and eat something that you really like. You do not need 5 mobile phones - it’s enough to have 1-2, but from good brands. And you definitely do not need gold toilets!
Calculate how much money you need to get everything you need for a high quality of life. It is also important to determine the amount of service for these things during the month (for example, utilities for a house, refueling a car, etc.).
Suppose you have calculated that you need income of $ 25,000 per month. It is this amount that will allow you to lead the lifestyle that you deserve and live in pleasure. You will reach the Financial Freedom Plan when your passive income is more than $ 25,000 per month. You can invest the difference that you have left, send it to support your relatives, invest in social projects, charity, spend on gifts to friends, hobbies and more.
I remind you once again that if you do not have any of the above plans, then plan B or the Poverty Plan is triggered. The Poverty Plan is especially critical for older people, when working capacity is significantly reduced and it becomes difficult to get active income from traditional sources.
Often, the standard of living is reduced, which is associated with need, deprivation and dependence on the state or relatives. This inevitably leads to dissatisfaction with life. That is why it is worth thinking now about Financial Independence and drawing up a plan for your financial future.
Come to the program "Personal Financial Plan" and create a program of financial independence for yourself!
Financial independence or financial freedom? Is there any difference?
After looking at the material of my personal finance colleagues, I saw controversy surrounding two terms: financial independence and financial freedom. Someone argues that these are fundamentally different concepts, while someone views them as synonyms. Which camp to join? I thought and decided that to no one. My goal is completely different.
I want to understand with you what needs to be done in order to achieve a standard of living where you don’t have to think about how to make money for existence. They will be enough to provide basic needs and some weaknesses, such as travel. Engage only in what brings pleasure and, without hesitation, fulfill your dreams. This is financial independence or financial freedom for me.
Independence is the lack of subordination, dependence on something, the ability to act independently and not be under the pressure of any factors.
Freedom is the right to manage your life the way you want it.
Therefore, financial independence (freedom) is an opportunity not to depend on the employer, salary and bonuses, a working day from 9 to 18, a vacation once a year and two days off a week. At the same time, you don’t have any financial difficulties, because the created assets work for you with a minimum of your participation.
So what's the difference, what is the name of such a state - freedom or independence? The main thing is to achieve it, and then you can do philosophy and look for fundamental differences in terminology.
What financial condition are you in?
Before drawing up a strategy for achieving financial independence, it is necessary to determine the current level. I made a slightly comic schedule, but it helps to visually assess your financial status.
Level “Below the baseboard”. Your expenses exceed your income. You do not even live from paycheck to paycheck, but are forced to borrow from friends, relatives, or at a bank. Any force majeure situation is a disaster for you.
Plinth level. You are standing on a hard surface. Costs equal income. There are no debts or payments on them are already included in the monthly expenses, so you easily pay them. There is no talk about any accumulations. But force majeure situations are still a disaster.
Level “Above the baseboard”. Your income exceeds expenses. You save some of the money for a rainy day. In any force majeure situation, you have money without getting into debt.
The level “Skirting of dreams”. You have achieved financial independence. We have formed a “safety cushion”, you have savings in various assets that bring a stable income, covering not only your current expenses, but also allowing you to realize your wildest dreams. Moreover, capital only increases over the years.
So what step are you on? For example, my place today is “Above the baseboard”. My husband and I formed a reserve fund and are actively saving money for further investment in various instruments. In less than a year, we will have enough to invest in some assets available to us. It would seem that it remains to step only 1 step and we are financially independent. But this step is the most difficult and longest in time.
Let's look at all the stages of achieving financial independence in more detail.
Analysis of the current situation
Before moving on to saving or investing, you need to analyze the current situation with your finances. If you maintain a family budget, then there should not be a problem with this. Monthly accounting of income and expenses will draw a picture in real time. You just have to study the numbers.
But just looking at them is not enough. A budget is prepared not only to analyze the current situation, but also to plan for the future. If your expenses exceed revenues (look at the comic ladder), then it's time to rectify this situation.
I’ll say the most banal thing in the world: “We need to reduce costs or increase revenues. And it’s better to do both. ” Everything is simple in theory, but so difficult to put into practice. I already see comments of the type “I live in a village, I get a salary of 10,000 rubles, I don’t get out of debt to reach a salary, I got loans to buy ...” Friends, you read this article on the freelancers blog. Have you heard about remote work, freelance and earning on the Internet?
Well, I will not teach you how to increase income. Now there are many opportunities for everyone. Only need to learn and try. Make mistakes and try again. In just 1 year I went to work in freelance work, 2 to 3 times higher than the salary in my main job. And this is not the limit.
But learning to cut costs is a must. Competent saving gives excellent results and does not lead to a hungry existence and a bad mood. More likely the opposite.
The result of the analysis of the current situation and the adjustment of the family budget should be a plan for allocating 5 - 15% of their income to form a “safety cushion”.
What is reserve capital: “airbag”, money for a “rainy day” and so on? This is a mandatory cash reserve that every person (family) should have in case of force majeure. Imagine that you have lost your job, the business has gone bad, the roof of the house has leaked or a difficult operation is ahead. Where to get the money from? A loan, a loan from relatives and friends? And how to give?
Unfortunately, we cannot protect ourselves from such situations. But we can help ourselves and our family get out of it without debt. It is for these cases that it is necessary to form reserve capital. Experts advise making it in the amount of 3 - 6-month amount of expenses. And you just learn the costs from your analysis of the family budget.
For example, your family spends 50,000 rubles a month. This means that reserve capital is needed in the amount of 150,000 - 300,000 rubles. And until you form it, do not proceed to the next step.
The main principles of the formation of "airbags":
Set aside a certain percentage of your salary or a specific amount in rubles, but do it every month. Personal finance experts recommend that you do this as soon as you receive income, and not according to the results of the month. At the end of the month, you are likely to spend all your earnings. Moreover, regardless of the amount of earnings.
- Quick access to money
You should be able to borrow money at any given time. It is best for storing reserve capital a replenished deposit in a bank with capitalization and with the possibility of withdrawal without loss of interest is suitable.
- Inviolability of the contribution before the occurrence of force majeure
This is the biggest temptation. Money is easily accessible, so with a weak will can flow in the direction of a new gadget, branded handbag or dress on sale.
If the negative version of events did occur and you had to withdraw money from the account, then after stabilizing the situation, return to the systematic replenishment of the amount to the required size.
Once the reserve fund is formed, you can proceed to the next stage.
Achieving financial stability
Financial stability allows you to feel confident in any situation. “Airbag” gives peace of mind, and the skill of monthly investments allows you to save further. And here is a very important point. What and how to save money?
In my articles, I have repeatedly touched on this issue. First of all, formulate the goals:
- short-term: winter coat, boots, TV, etc.,
- medium-term: car, repair, etc.,
- long-term: cottage, apartment, child education, pension.
And here a personal financial plan will help. It is such a plan that will help set priorities in goals, determine the amount and mechanisms of accumulation.
Ideally, for each short-term and medium-term goal, there should be its own mechanism and instrument of accumulation. For example, a deposit in a bank, a metal account, a foreign currency account, mutual funds and other tools for saving and increasing personal funds.
Here you can not do without studying financial books, special resources on the Internet or the help of a personal finance consultant.
The main principle of achieving financial stability is diversification of investments. Everyone talks about it and a lot. Therefore, it is so important to increase your financial literacy in order to navigate the existing investment tools. Unfortunately, while most of the country's citizens mainly use bank deposits.
Achieving financial independence
The top of our ladder is financial independence. You are free to choose where and how you live, what to do. Your money works without you and for you. In the wonderful book by Bodo Schaefer, “Mani, or the ABC of Money”, there is a parable about a chicken laying golden eggs. It is worth knowing to adults and telling your children. In it is the seed of the right investment. You can’t kill a chicken that lays you golden eggs.
So it is with capital. You can not spend the accumulated capital, which brings passive income. It can be increased, but not reduced.
No one will ever tell you how long it takes to become financially independent. But once having risen on this ladder, you will not be the same. When I hear the sayings rooted in our citizens, “Happiness is not in money” or “Money spoils people,” I always remember the company of drunks who regularly gather in an abandoned house in the neighborhood. Of course, their happiness is not in money, which can hardly spoil these people.
And who still believes that money is a universal evil, read the books of those who have gained financial independence and remained wonderful people.
Articles on personal finance always collect the most responses and comments. Wicked and kind, judgmental and supportive. So, this topic is relevant. I think that the talk about the next pension reform will shake up our citizens, who are wary and cautious of any changes.
I do not teach anyone to live. Each person has a choice. Someone is satisfied with a salary of 10,000 - 15,000 rubles and hanging on similar blogs to offend the authors, accuse them of populism, isolation from real life and other deadly sins. And someone is looking for a way into another life, which is real. It is not money that controls a person, but a person controls money.
How to gain financial freedom and independence? Of course, one article does not find the answer to this question. But she gave clues what and how to look further. So let's take our first step on the stairs or will we sit below the baseboard?